Outlook: Sir Brian rolls out the Three Cs

WHEN CLEARING bank chairmen start complaining there is too much capacity in the market, what they really mean is that there is too much competition. Their answer to the above problem is consolidation. Yesterday it was the turn of the bankers' banker, Sir Brian Pitman of Lloyds TSB, to roll out the Three Cs.

Yesterday's results from the bank were weighed down by heavier than expected pension mis-selling provisions and the share price over-reacted accordingly. But what ought to be exercising the markets is how Lloyds along with the rest of the sector is going to adjust to a downturn in the economic cycle and an upturn in the degree of regulation over the next couple of years.

That is where consolidation comes in. Lloyds is still generating capital faster than it can find uses for the stuff and probably has pounds 1bn-pounds 2bn to throw around on a stray mortgage provider or insurer.

But Sir Brian seems to envisage the kind of banking consolidation we have seen in the US and Europe in coming months, which involves capital outlays of a rather larger order or mergers of equals.

Virtually none of the banks deserve the fancy ratings they currently enjoy, and we are likely to see a re-rating of all the financials in the coming months. But Lloyds deserves to be toward the top of the banking pile, not the bottom. It has lower costs than most of its rivals, it takes a tough stance on credit quality, it has some great brands - Cheltenham & Gloucester, for example - and it will continue to realise cost savings from the integration of the Lloyds and the TSB networks.

Having the cash or paper to do the deals is one thing. Getting regulatory clearance is quite another.